J.P. Morgan strategists say they were much too cautious around 'unpredented' expectations for earnings growth
A "blue sky" setup is getting closer for this stock market, but the going won't be smooth, J.P. Morgan strategists said.
J.P. Morgan strategists said they have one big regret at the midyear point as they bumped their year-end S&P 500 target to 7,800: not being optimistic enough about earnings expectations.
For 2026, year-to-date consensus earnings growth has been revised up to approximately 20% on average for the next two years, in line with "a near doubling" of artificial-intelligence capital expenditures, a team led by Dubravko Lakos-Bujas, the firm's head of global markets strategy, said in a note to clients on Wednesday.
"In hindsight, we should have been even more positive on the outlook for S&P 500 earnings growth, which has seen YTD upgrades to both 2026 and 2027 consensus estimates of [approximately] 10%," they said.
What's more, this type of positive revision is "unprecedented," they said, noting that it is normally seen only after a shock or following a recession. Add to that the increasing likelihood of a peace deal between the U.S. and Iran, and their "blue sky" scenario is becoming more likely, hence their decision to lift their S&P 500 SPX target to 7,800 from 7,600.
They had discussed that "blue sky" possibility back in April after cutting their target to 7,200, saying that it hinged on a "swift resolution" to the Iran conflict that would allow the S&P 500's multiple to "re-expand" toward 23 times, implying an index level of 8,000. The forward multiple currently stands at 20.7 times, so it's getting close.
The strategists also lifted their 2026 S&P 500 earnings-per-share estimate to $350 but said they are below consensus with a forecast of $390 for next year, "reflecting the risk of diminishing AI-related pricing power."
The path to 7,800, however, won't be smooth, Lakos-Bujas and the team said. There are several hurdles to clear, including strong back-to-back earnings that have reset the bar higher ahead of second-quarter earnings season. That will make it tougher for companies to surprise on the upside for earnings and when it comes to capital expenditures.
The strategists also warned of "extreme crowding" among momentum stocks, notably for low-quality and speculative growth segments, such as second- and third-order AI plays. With a possible reversal at risk, they said they are wary of a potential "flash crash."
"Moreover, the rapidly increasing equity supply expected over the coming quarters, alongside potentially tighter monetary policy, could constrain equity multiples," the strategists said.
The stock balance they favor now is a barbell with quality growth on one side and direct AI plays and low volatility on the other. "Quality growth is largely tied to the AI theme, offering double-digit organic growth, healthy balance sheets, and strong shareholder returns. While low [volatility] remains out of favor, we see it as a cheap portfolio hedge and diversifier," they said.
They remain bullish on tech and AI upstream plays such as utilities and some industrials, along with defense stocks and banks, and said higher-growth areas of healthcare are also starting to show some value. Bets against healthcare industries by managers who want to raise cash to put money elsewhere have been a feature since President Donald Trump's April 2025 "liberation day" tariff announcement, they said.
As for energy, while it's the "best geopolitical hedge in a portfolio," a 19% year-to-date gain means investors should be cashing in, while consumer names could outperform, especially if a peace deal holds.
The strategists also had a few things to say about retail investors, noting that 2026 has "set a different tone" compared with 2025, with less buying of the dip and more chasing gains in speculative tech stocks. Since April, retail flows have mostly been tracking the market, with investors buying memory stocks and broader tech, they said.
-Barbara Kollmeyer
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(END) Dow Jones Newswires
June 24, 2026 10:46 ET (14:46 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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